Longevity de-risking to be increasing concern for continental funds - Aon Hewitt
EUROPE - Pension funds in the Netherlands, Germany and Switzerland are starting to consider longevity swaps, buyouts and buy-ins to solve problems arising from increased life expectancy, according to Aon Hewitt.
The trend, which would see the continent follow the UK towards greater use of such de-risking strategies, will lead to strong and rapid growth in the risk settlement market, the consultancy predicted.
Matt Wilmington, principal consultant at the firm, said: "Broadly we are seeing all the same things in Europe as in the UK."
Local and multinational companies in European countries with major defined benefit (DB) pension scheme markets - Switzerland, Germany and the Netherlands - were also very concerned about the liabilities on their books, he said.
Cash funding and accounting figures were a concern for the businesses, he said, particularly with equity analysts worried about volatility on the balance sheet.
"Where we've been a bit slower in Europe is in recognising the changes in life expectancy," said Wilmington, who works in the firm's international retirement and investment team.
As a result, the Netherlands, Germany and Switzerland had been slower to make risk settlement transactions, Wilmington said, adding that Switzerland and Germany in particular were making fewer changes for life expectancy.
"Over the last four or five years, that has been reason why risk settlement opportunities haven't really taken off in Europe," he said.
But this was now starting to change, Wilmington said. The Netherlands had revised longevity assumptions twice in the last five years. Meanwhile, Switzerland had changed its assumptions in 2011 to a more realistic level and Ireland had now started to use longevity tables similar to those used in the UK.
"As pension schemes and companies increasingly recognise the issues caused by changing life expectancy, we expect to see [risk settlement] providers improving their offerings and for these markets to grow substantially in a short space of time," he said.
Aon Hewitt said the Dutch pensions industry was awaiting the outcome of the new pensions agreement, to learn whether sponsors will be able to cut benefits to reflect increases in life expectancy.
The result is critical in determining whether the country's €1.2trn market opens up to risk settlement, the firm said.
In Switzerland, Germany and Ireland, there was a clear appetite to de-risk, it said.
As historic assumptions about life expectancy were now reviewed and updated, Aon Hewitt predicted there would be a rush towards the risk settlement market in these countries.